Fitch affirms Natura Cosmeticos' initial issuer default ratings at BBB; outlook stable
November 4, 2011
– Fitch Ratings has assigned 'BBB' Foreign and Local Currency Issuer Default Ratings (IDRs) and a National Scale Rating of 'AAA(bra)' to Natura Cosmeticos S.A. (Natura). The Rating Outlook is Stable.
Natura's investment grade ratings reflect its very strong capital structure, robust operational cash flow generation and its consistent and profitable business model. The ratings also consider a somewhat limited geographic diversification, with almost all of its cash flow generation derived from Brazil, as well as strong competition. The favorable outlook for the consumer industry in Brazil is also factored into the ratings.
Strong and Profitable Business Profile
Natura's business strength is supported by its leading market position in the Cosmetics, Fragrances and Toilette (CF&T) sector in Brazil, its competitive cost structure, a successful direct sales structure in Brazil and strong brand recognition. The company's strategy focuses on sustainability. Continuous efforts are made to innovate and launch new products. The company's reach through its extensive sales structure is considered an important competitive advantage and Natura seeks to continue to increase the number of sales consultants (1.4 million as of Sept. 30, 2011, with 1.1 million in Brazil). Natura also benefits from the characteristics of the direct sales channel in Brazil, which has increased its share within total CF&T sales and complements the revenues of the sales consultants.
Going forward, Natura's main challenge is to continue to conduct its activities on a profitable basis while preserving its strong market position in Brazil, within the context of a fierce competition and lower market growth rates. Fitch believes that the company will be able to capture benefits from the internal actions it has taken that are aimed at improving operational efficiency and reducing delivery time to Natura's final customers.
Robust and Resilient Cash Flow From Operations
Natura has historically had a sound operational performance, with increasing revenues (compound annual growth rate [CAGR] of 18.7% from 2007 to 2010) and stable EBITDA margins at around 23%-24% in the last five years. These margins are higher than those posted by some of its key competitors. Natura's competitive advantages and its low average sales ticket, which allows Natura to mitigate demand fluctuations due to credit constraints, are the main factors that contribute to this resilient performance even during periods of lower economic activity. For the last 12 months (LTM) ended Sept. 30, 2011, net revenues and EBITDA reached BRL5.5 billion and BRL1.3 billion, respectively, which compares positively with the BRL4.2 billion and BRL1 billion posted in 2009. Funds from operations (FFO) and cash flow from operations (CFO) remained robust at BRL841 million and BRL770 million, respectively.
Natura has historically had high dividend payments, which have pressured its free cash flow (FCF) generation. During the LTM ended Sept. 30, 2011, FCF was negative at BRL342 million, while during 2007-2010, FCF ranged from negative BRL190 million to BRL90 million. However, dividend distribution has been mainly underpinned by the lack of alternative use of the resources, since the company's investments and financial obligations are supported by its operating cash flow generation and leverage is low. During the last five years, Natura's dividend payout was around 90% on average. During the coming years, FCF should continue to be negative as the company is expected to maintain its aggressive dividend payout while financing its planned investments. However, the agency considers that Natura has great financial flexibility to reduce these payments if needed.
Strong Financial Profile
Natura has historically maintained low leverage ratios, in spite of strong dividends and investments made in the recent years, including the expansion of operations abroad. For the LTM ended Sept. 30, 2011, the total debt to EBITDA ratio was 0.9 times (x) and net debt to EBITDA was 0.6x. Interest coverage by EBITDA was strong at 16.1x for the same period. From 2007 to September 2011, the company reported, on average, total leverage of 0.7x and net leverage of 0.2x. Going forward, Fitch expects Natura's leverage to remain low, with net debt to EBITDA maintained at around 0.4x, despite higher planned capital expenditures.
Natura has a track record of strong liquidity position, with an average position of cash relative to short-term debt of 1.5x. In the short term, Fitch expects some temporary cash reductions due mainly to dividend payments that occurred during the third quarter of 2011 (BRL333 million). As of September 2011, total debt amounted to BRL1.1 billion, with short-term maturities of BRL455 million and cash and equivalents of BRL339 million. Debt was composed of debentures (BRL365 million), BNDES financing (BRL286 million), working capital loans (BRL241 million), 4131 Resolution (BRL174 million), and others (BRL59 million).
Challenge to Increase Geographic Diversification
Natura's operating cash flow generation is still concentrated in Brazil, which represents almost all of consolidated EBITDA. Natura's international operations, which are concentrated in other Latin America countries, still require high marketing expenses and as a result have generated negative operational results. Fitch understands that this is inherent to Natura's business model, since the direct sales structure demands brand recognition, which takes some time to develop before sales are large enough to dilute high marketing expenses. Fitch views as positive the company's goal of achieving broader geographic diversification in the medium term as well as the fact that these activities have been developed without being capital intensive.
Key Rating Drivers:
The ratings could be positively affected if Natura succeeds in reaching broader geographic diversification, thus mitigating macroeconomic risks. Negative rating actions could be triggered by a severe reduction in operating cash flow generation and by liquidity position that could lead to a worsening of the company's credit metrics and/or a deterioration in its brands' reputation and in its leading market position.
Additional information is available at ' www.fitchratings.com `. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Metholodogy' (Aug. 12, 2011);
--'National Ratings Criteria' (Jan. 19, 2011).
Applicable Criteria and Related Research:
National Ratings Criteria
Corporate Rating Methodology
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